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Meaning of Mutual Funds
Mutual funds are non-banking financial intermediaries that pool money from investors to invest
in stocks, bonds, and other securities
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These funds collect money from investors and use it to buy assets as per their investment
objectives
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By
pooling funds, mutual funds lower costs related to security analysis, portfolio management, and
trading
...
Income funds focus on debt instruments such as bonds and debentures
...
Professional fund managers handle
the investments to maximize returns while minimizing risks
...
Mutual Fund classifications
Open-End Funds
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Continuously sell and repurchase units
...
•
The fund grows when more units are sold than repurchased and shrinks when redemptions
exceed sales
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Examples:
SBI PSU Direct Growth, HDFC Infrastructure Fund, ICICI Prudential India Fund
Closed-End Funds
•
Sell a fixed number of units only once
...
•
Units may trade at a discount or premium to NAV
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•
SEBI regulations ensure investors have at least one or two exit options
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Front-End Load (Entry Load): Deducted from the investor’s contribution at the time of
purchase
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Deferred Load: A fixed charge applied to the fund over time
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Back-End Load (Exit Load): Deducted from redemption proceeds when the investor exits
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Some funds adjust
exit loads based on the investor’s duration in the fund, known as a contingent deferred sales
charge—the longer the stay, the lower the exit load
...
SEBI
considers a fund "no-load" if the fund house (AMC) absorbs marketing costs instead of charging
investors
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9 units instead of 9
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If the redemption price is ₹10
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49 per unit instead of ₹10
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This shows how loads impact returns
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In India, any income
earned by a mutual fund is tax-free
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Tax-Exempt Funds: These are funds where the income generated, such as dividends or capital
gains, is exempt from tax
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For example, certain municipal bonds or government-backed
schemes may fall under tax-exempt funds
...
Examples:
SBI Long Term Equity Fund Direct (G), HDFC Tax Saver Fund Direct (G), ICICI Prudential
ELSS Tax Saver Fund Direct (G)
Non-Tax-Exempt Funds: These funds do not offer any tax benefits
...
Most equity or debt funds fall into this category
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Investors should be aware of applicable taxes when buying, holding, or selling mutual fund units
...
These funds aim to generate returns by capitalizing on the growth potential of the companies
they invest in
...
Investors in equity funds are exposed to market fluctuations, as the value of stocks can rise or fall
due to economic conditions, company performance, and other factors
...
Aggressive Growth Funds
Blue chips that are recognised market leaders
...
But not entirely unproven and speculative
Primary objective is capital appreciation over a three-to-five-year span
...
They provide a
steady income stream and potential capital appreciation
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They focus on financially stable companies
with a history of consistent dividend payouts
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These funds offer long-term
capital appreciation and are ideal for investors seeking tax savings along with wealth creation
through equity investments
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Examples:
SBI Long Term Equity Fund, HDFC Tax Saver Fund, ICICI Prudential Long Term Equity Fund
Equity Index Funds
These funds track a specific stock market index, like the S&P 500 or Nifty 50, by holding the
same stocks in the same proportion
...
Suitable for investors seeking diversification with minimal fund
manager intervention
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They aim for long-term capital appreciation as these stocks
eventually reach their fair value
...
Examples:
SBI Contra Fund, HDFC Capital Builder Value Fund, ICICI Prudential Value Discovery Fund
Speciality funds
Sector Funds
These funds focus on specific industries, such as technology, healthcare, or energy
...
Ideal for investors
who have strong conviction about a particular industry’s growth prospects and can handle
volatility
...
H
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They help mitigate country-specific risks and tap into
growth opportunities in foreign economies
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Examples:
SBI International Access – US Equity FoF, HDFC Developed World Indexes Fund of Funds,
ICICI Prudential Global Stable Equity Fund
Mid/Small Cap Equity Funds
These funds invest in medium and small-sized companies with high growth potential
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Best suited for
aggressive investors with a long investment horizon willing to withstand market fluctuations
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They aim to enhance returns and reduce volatility
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Examples:
SBI Equity Savings Fund, HDFC Equity Savings Fund, ICICI Prudential Equity Savings Fund
Money Market/Liquid Funds
Money market or liquid funds invest in short-term debt securities (maturing in less than a year),
such as treasury bills, certificates of deposit, and commercial paper
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These funds aim to preserve capital while providing stable returns
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Investors seeking safety, quick access to funds, and moderate returns prefer these funds
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Gilt Funds
Gilt funds invest in government securities with maturities exceeding one year, known as dated
securities
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However, they are highly sensitive to interest rate changes—when rates rise, the fund’s NAV
drops, and vice versa
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Gilt funds suit risk-averse investors looking for long-term, government-backed investments with
relatively stable returns, though market conditions may cause short-term volatility in fund value
...
Balanced Funds
Balanced funds include a mix of debt instruments, convertible securities, preference shares, and
equities
...
They aim for income generation, moderate capital appreciation, and capital preservation, making
them ideal for conservative, long-term investors
...
They invest in companies with a history of good dividends and the potential for capital growth
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Examples: HDFC Hybrid Equity Fund, ICICI Prudential Equity & Debt Fund, SBI Equity
Hybrid Fund
Asset Allocation Funds
Asset allocation funds have a predefined strategy for investing in different asset classes
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The success of such funds depends on the fund manager’s market expertise
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They target low risk and stable income but carry higher price fluctuation risks
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Diversified Debt Funds
Diversified debt funds invest across various debt securities from different sectors
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By spreading investments across sectors, they reduce individual risk, with a broad investor base
contributing to risk sharing and stability
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These funds are riskier due to limited diversification and exposure to sector-specific defaults
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Examples: SBI Magnum Gilt Fund
High Yield Debt Funds
High yield debt funds invest in "below investment grade" debt instruments, also known as junk
bonds, offering higher returns but carrying significant default risk
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Examples: SBI Credit Risk Fund, HDFC Credit Risk Debt Fund, ICICI Prudential Credit Risk
Fund
Assured Return Funds
Assured return funds, common in India, guarantee returns over a fixed period, typically in debt
or income funds
...
SEBI permits such schemes with guarantees from reputable sponsors
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These funds are not listed on stock exchanges and aim to provide income returns over a short
period
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Examples: SBI Fixed Maturity Plans, HDFC Fixed Maturity Plans
Commodity Funds
Commodity funds invest in commodities directly or through shares of commodity companies or
futures contracts
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A popular example is precious metal funds, such as gold-linked schemes
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They may also invest in securitized real estate assets
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Examples: HDFC Property Fund, ICICI Prudential Real Estate Fund, SBI REIT Fund
Exchange Traded Funds (ETFs)
ETFs combine features of open-end and closed-end funds, tracking market indices and trading
like individual stocks on exchanges
...
ETFs are popular internationally and in
India, with units traded and priced on the exchange
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Examples: SBI Nifty 50 ETF, HDFC Sensex ETF, ICICI Prudential Nifty Next 50 ETF
Fund of Funds
A Fund of Funds invests in other mutual funds, offering diversification across various schemes
and asset managers
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Examples: SBI Global International FoF, HDFC Asset Allocator Fund of Funds, ICICI
Prudential Passive Multi-Asset Fund of Funds